What investors can learn from Ray Dalio

Ray Dalio is without doubt a member of the master class of
the world’s investors. He runs Bridgewater
Associates, one of the most successful and the
largest hedge funds in the world.

Similarly, like many of the Investment
Masters, Ray believes in seeking the truth
by testing
investment ideas, learning from mistakes and
remaining humble.
This was never more evident than in his experience in predicting
the Debt Crisis in the early 1980’s. Whilst his prediction was
uncannily accurate, Ray also predicted that the stock market
would fall at the same time. The reality was something different,
however, and when the market actually rose instead, Ray lost so
much of his own and client’s capital that he was forced to let go
all of his staff, and had to borrow $4,000 from his father to
simply pay his household bills. It’s fair to say that Ray felt
the pain of his mistake deeply. Ray stated that the pain of this
error allowed him to change his attitude towards mistakes, and to
see them as puzzles that needed to be solved instead. It also
allowed him to start asking himself what he would do differently
in the future to avoid the pain.

“I believe that anyone who has made money in trading has
had to experience horrendous pain at some point. Trading is
like working with electricity; you can get an electric
shock. With the pork belly trade and other trades, I felt
the electric shock and the fear that comes with it. That led to
my attitude: let me show you what I think, and please knock the
hell out of it” — Ray Dalio

“I met a number of great people and learned that none of
them were born great. They all made lots of mistakes and had
lots of weaknesses – and that great people become great by
looking at their mistakes and weaknesses and figuring out how
to get around them.” — Ray Dalio

Other Investment Masters have also learnt the same
lesson.

“I lost my stakes a couple of times, which taught me risk
control and risk management. Losing those stakes in my early
20s gave me a healthy dose of fear and respect for Mr. Market
and hardwired me for some great money management tools.”
— Paul Tudor-Jones

“My dad was a retail pharmacist and after I started
attending law school he said “well you have to learn how to be
an investor”. He and I traded tiny amounts of tech stocks and
mining stocks together. So I became very interested in markets
and trading. In the period of time from 1967-1974 he and I
found just about every possible way conceivable to lose money.
So when I started Elliot in 1977 I was determined to engage in
a trading strategy that made money all the time. So for the
first 10 years of Elliot’s existence the primary strategy was
convertible bond hedging” — Paul
Singer

“I went into this tech stock with 100% short position, and
all the money I saved up because I thought I had this one
locked down. We had fully positioned ourselves, myself and all
my customers and clients I was advising, and then a technology
writer dubbed the company the ‘Son of Intel’. The stock
went promptly from about $16 to $40. I got margin called all
the way up until I was completely wiped out. I lost all of my
money. I was apoplectic. I thought the world was going to end.
I remember that like it was yesterday. That was the greatest
thing that ever happened to me – losing all of my money on
something where I knew I was right. From an investing
perspective, getting completely wiped out and thinking it was
the end of the world, and thinking I was an abject failure, and
this investing thing wasn’t for me. Looking back at it, it
couldn’t have happened at a better time in my life. You want
that to happen as early in your career as it can and you want
it to be the most devastating blow that could possibly hit you,
to teach you, to bring humility into your investing and teach
you that you should never set yourself up for the knockout
punch. It teaches you never to put 100% into anything. It
teaches you a lot about sizing, it teaches you a lot about
life, no matter how much you think you have your arms around a
situation, you never do” — Kyle
Bass

It was the recognition of the need to learn from mistakes that
led to the development of Ray’s Principles.

“You have to learn from mistakes to keep getting better. And
it’s through learning from those mistakes that you learn what
reality is and how to deal with it, which is
called Principles“

Interestingly, Ray is about to release a new book entitled
‘Principles‘.
This will be an absolute must-read and I have already pre-ordered
it. Ray released the first document titled ‘Principles‘ on the
Bridgewater Associates website back in 2011. The original
‘Principles‘ focuses on Ray’s most fundamental truths about life
and in addition, his beliefs and ideals regarding people
management. Over the years I’ve often referred back to the
original text, and while Ray has updated it in the new book, the
original document remains a favourite of mine.

Bridgewater Associates investment style differs from many of the
Investment Masters in so much as they invest across a broad
spectrum of asset classes and regions, both long and
short, and seek approximately 100 different return streams
that are roughly uncorrelated to each other. While there isn’t a
lot of commentary on investing per se in the original
‘Principles’ document, it does include the psychological insights
and approach to learning that parallel with other great investors
and give Bridgewater their edge.

This is evident in the company’s employment philosophies. On the
Bridgewater Associates website’s career page, they ask potential
employees to ask themselves a number of questions before applying
to work there. These include:

“Do you want to: Discover your strengths and
weaknesses? Work to get better fast? Put aside ego
barriers to learning? And, demand others to be truthful and open,
and are you prepared to to do the same?”

In conjunction with the release of the new book, Ray has given a
very insightful Ted Talk where he
discusses the processes he developed to successfully navigate the
markets. Ray describes himself as a hyper-realist; he’s a
broad thinker who meditates and recognizes there are many lessons
to be learnt from nature and history. It
was by studying history that provided Ray with the insights to
anticipate the Global Financial Crisis.

It’s no surprise Ray features prominently throughout the
tutorials included in the Investment
Masters Class. Here’s a taste of some of the Principles which
are behind Ray’s success..

“I learned that failure is by and large due to not
accepting and successfully dealing with the
realities of life, and that achieving success is simply a
matter of accepting and successfully
dealing with all my realities.”

“I learned that finding out what is true, regardless of
what that is, including all the stuff most people think is
bad—like mistakes and personal weaknesses—is good, because I
can then deal with these things so that they don’t stand in my
way.”

“I learned that there is nothing to fear from truth. While
some truths can be scary—for example, finding out that you
have a deadly disease—knowing them allows us to deal with them
better. Being truthful, and letting others be completely
truthful, allows me and others to fully explore our thoughts
and exposes us to the feedback that is essential for our
learning.”